Valuation models

Credit default swap

Implied hazard rate and default probabilities from a credit spread, upfront and points at a standard coupon, CS01 and jump-to-default.

Inputs

The contract buys protection: it pays the coupon and is paid on default.

Results

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Methodology

Conventions

  • Flat hazard rate calibrated to the par spread, or piecewise-flat hazard rates bootstrapped from a curve of par spreads; weekly default integration.

References

  • O'Kane, Modelling Single-name and Multi-name Credit Derivatives

Formulas

Survival
Q(t) = exp(−∫ λ(u) du)
Par spread
s = PV(protection) / RPV01